Have you heard about microinvesting? It is all the rage with personal finance bloggers. What is microinvesting? I think of it as like dividend reinvesting without the fees and the dividends. In traditional investing you must pay trading fees or some other fees to buy shares of stocks. You may need to start with $100 to enter a dividend reinvestment plan. Or you could take advantage of an employee stock option plan at work.
The thinking behind microinvesting is that it is too expensive for many people to invest in the stock market. Suppose you must pay a $5 or $10 trading fee every time you buy or sell an equity? That adds to your costs. And if you invest only in mutual funds or exchange traded funds you will be charged administrative fees. The fees add up and eat away at your profits. This is very bad for small investors. We don’t have much money and we are not experts at picking stock market winners. The average person chooses poor investments.
Microinvesting services have been around for several years but there are still only a few. You can learn about a few microinvesting services here. Each one has its strengths and weaknesses. Their propositions are about the same: they want to help you invest with as little money as possible and for as low a cost as possible.
My bank offers an investment service. They charge a low monthly fee but I am not impressed with it. I have used E*Trade for years. I don’t like E*Trade very much but it’s easy enough to use their service. And yet I must plan for those pesky fees every quarter! Well, they have gotten better over the years. I don’t maintain a large portfolio but even though brokers are competing with each other they only offer the lowest fees to people who make more trades. I want to make fewer trades. Hence I am looking at the microinvesting services.
You can buy into no-load mutual funds. Investopedia has a nice article explaining no-load mutual funds. If your employer is smart they choose no-load funds for your retirement plans. When I was working for companies they were not so smart. Ouch! Be aware that you must still pay administrative fees on no-load funds. So be careful when choosing where to invest your money.
If the world of investing is about to drop the brokers’ trading fees that will be a good thing for all of us. Wealthy people don’t care about these fees. We small investors must think about them carefully. If you need your broker’s help to purchase a stock or option then you’ll pay an additional fee. I hate fees!
Is Microinvesting Really Free?
Of course not. These companies must make a profit somehow. But another question we must ask is how much it will cost us to invest any money at all?
Some people recommend the Acorns solution. They have you link a debit or credit card to your account. Then every purchase you make with that card is rounded up to the nearest dollar amount. The difference between the actual purchase price and what you pay is deposited into your Acorns account. You build up your investment reserve the way a squirrel builds up a stash of acorns.
Acorns charges a very low monthly fee but if you want more control over your investments then you must pay a higher fee. And you can fund your Acorns account directly from your bank account.
That’s really not what I am interested in. But the microinvesting service that caught my eye is Robinhood. No-fee trading got my attention, mama!
The Robinhood trades are not instant but I can live with that. Not having to worry about broker fees is a load off my mind. Literally!
But how does Robinhood make money? They sell you better service. The free service is very basic. They hope you decide to pay for better service. It is that simple.
Where Should You Put Your Money?
If you don’t want to think about investing — if you don’t trust your judgment — then the roundup companies like Acorns are probably a better choice for you. Acorns invests your money in exchange traded funds. These are the least expensive of the mutual funds and they are built to follow the major indexes. You can still lose money if you sell at the wrong time but your money is considered safe in an ETF.
If you like being able to trade into and out of stocks without paying broker fees then try a service like Robinhood. Your bank may have a better option for you but mine charges a monthly fee.
The true riddle of microinvesting is how best to use it without getting carried away. I recommend testing the waters first. Don’t move your whole portfolio over there. Better to add a little bit of money at a time until you understand the service better. No matter which microinvestor you choose, don’t put all your eggs into one basket. But be careful not to spread yourself too thinly. Choose only 1 or 2 and stay with those for a while.